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Friday, November 9, 2012

CID Speaker Series: Grading Latin American Presidents

CID's Speaker Series this fall has focused on the practice of
development. This week we turn to research regarding Latin
America. Please join Juan José Cruces,
Universidad Torcuato Di Tella, Central Bank of Chile for this
talk. Below is an abstract about his recent paper to
discuss.

Abstract

We propose a novel approach to grade presidential economic
performance using stock returns. In efficient markets, asset prices
are unique in that they impound the long term effects of changes in
the environment, including government policy. To purge
national returns of state-of-the-world conditions that do not
result from local events, we introduce a global twin portfolio and
a regional return. The twin portfolio for a country reports
the return of a combination of world stocks that each month has the
same industrial composition as that one country’s stock
index. These benchmark external conditions are most volatile:
they vary between a 295% appreciation (or tailwind under some
interpretations) and a 30% reduction (or headwind) in asset prices
over extreme four-year presidencies in our sample. We
interpret the gap of national performance over these counterfactual
returns as a proxy for the quality of domestic policies during a
given presidency, as seen from the standpoint of equity
investors. We apply this approach to seven Latin American
countries from 1980 until 2011. From this perspective,
Colombia, Peru and Chile stand out as the countries that have
implemented the best long run policies over the sample. In
addition, we provide a grading of relative presidential
performance.